China Aviation Oil to sell 39% stake in Xinyuan petrochemicals firm

It is streamlining its portfolio assets after exiting petrochemical trade.

China Aviation Oil (CAO) intends to sell its 39% stake in China Aviation Oil Xinyuan Petrochemicals (Xinyuan).

For CIMB analyst Cezzane See, the sale will have a minor impact in CAO’s earnings. “We believe the proposed sale could be CAO’s way of streamlining its portfolio assets, especially since it has exited the petrochemical trading business,” she said.

For Q1 of 2018, Xinyuan contributed US$200,000, or a mere 0.9%, to CAO’s share of associates profit of US$21m. From 2008 to 2017, it has on average accounted for 1.6% of CAO’s share of associates profit, with its highest contribution at US$1.6m in 2014, but only due to the reversal of prior year impairment provisions made.

“Hence, its disposal will have a negligible impact on CAO’s future associate profits, in our view,” See said.

Back in 2007, CAO sold 41% of its stake in Xinyuan to Shenzhen Juzhengyuan Petrochemical (Juzhengyuan) for $4.3m. The sale was on a “willing-buyer willing-seller” basis and at the original acquisition price CAO invested in Xinyuan in FY04, despite Xinyuan being a loss-making company, See noted.

Assuming the sale is performed on a similar basis as in 2007, CAO could gain around US$3m, which is still a minor sum given that CAO had a net cash of US$171.5m as at end-1Q2018.

In the end, Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) continues to be CAO’s associate gem. It accounted for 90.1% of its 1Q2018 associate earnings.

The Shanghai Pudong airport started trial runs on its fifth runway at end-2017. See said this could drive 2018 refuelling volumes for SPIA, whilst 2019 volumes could grow further with the completion of the airport's satellite terminal to boost passenger capacity to 80 million.

CAO highlighted that it is seeking M&A opportunities as it intends to expand its global jet supply and trading network. “We are positive on CAO's expansion beyond being just a China-centric player,” See concluded.